By Spy Uganda
The International Energy Agency (IEA) has sharply lowered its forecast for global oil demand this year, warning that months of elevated fuel prices, disrupted shipping routes and constrained product supplies have significantly weakened consumption across major economies.
In its latest Oil Market Report, the Paris-based agency revised down its 2026 oil demand outlook by 700,000 barrels per day (bpd) from its previous forecast, citing an unexpectedly steep contraction in second-quarter consumption.
According to the report, global oil deliveries during the second quarter fell by 5 million bpd compared with the same period last year, prompting the agency to forecast an overall decline in demand of 1.1 million bpd for the year.
The downgrade reflects the lingering effects of supply disruptions linked to tensions in the Middle East, higher energy costs and weaker industrial activity in key consuming nations.
However, the IEA expects the market to recover in 2027, forecasting demand growth of 2 million bpd as trade routes normalize, oil prices ease and economic conditions improve.
“Recent market developments have underscored the vulnerability of global energy demand to supply shocks and prolonged price pressures,” the agency said.
While demand has weakened, global oil production has also come under significant strain.
The IEA estimates that worldwide oil supply will fall by 3.9 million bpd this year to an average of 102.4 million bpd before rebounding strongly by 8 million bpd next year to reach 110.3 million bpd.
Global production slipped to 94.5 million bpd in May, down 600,000 bpd from April and 13.6 million bpd below levels recorded before the outbreak of conflict in the Middle East.
The agency said a breakthrough diplomatic agreement between the United States and Iran could pave the way for a gradual restoration of regional oil exports, potentially easing one of the most significant disruptions to global energy markets in recent years.
The interim agreement, expected to be signed in Switzerland, would facilitate the reopening of the Strait of Hormuz and lift restrictions on Iranian oil shipments, allowing more crude to reach international markets.
The prospect of increased supply has already cooled oil prices.
North Sea Dated crude has fallen by more than $40 per barrel since May, trading at around $82 per barrel by mid-June. ICE Brent futures were hovering near $81 per barrel at the time of the report, roughly $37 below their early-April highs, though still about $20 above levels seen at the start of the year.
The Strait of Hormuz, through which a significant portion of global oil exports passes, is showing signs of recovery after months of disruption.
The IEA reported that oil shipments through the strategic waterway rose from a low of 9.6 million bpd in May to approximately 12 million bpd in early June, aided by increased ship-to-ship transfer operations in the Gulf of Oman.
Despite the improvement, the agency cautioned that a full recovery remains some distance away.
Mines must still be cleared from key shipping lanes, while logistical challenges, insurance concerns and unresolved political issues continue to hamper the return to normal operations.
The supply disruptions have also hit refinery operations worldwide.
Global crude processing is expected to contract by 2 million bpd this year to around 82 million bpd, with the sharpest decline occurring during the second quarter when refinery throughput fell by 4.7 million bpd compared with the same period last year.
The steepest reductions were recorded in China, the Middle East, Eurasia and non-OECD Asian economies.
Refinery activity is expected to recover next year, however, rising by 3.1 million bpd as crude supplies stabilize and feedstock availability improves.
Despite weaker demand, global oil inventories continue to decline at an alarming pace.
The IEA reported that observed global stockpiles fell by 143 million barrels in May, equivalent to 4.6 million bpd, following a 74 million-barrel drawdown in April.
Since the onset of the Gulf conflict, oil inventories have been declining by an average of 3.8 million bpd, with crude accounting for roughly two-thirds of the drawdown and refined products making up the remainder.
Government-controlled reserves in OECD countries have been particularly affected.
Emergency stock releases pushed strategic inventories down by 163 million barrels, leaving them at their lowest levels since December 1990.
Looking ahead, the IEA believes the oil market could move from deficit to surplus if production recovers more rapidly than demand.
By 2027, global oil demand is expected to reach 105.3 million bpd, while supply could rise to approximately 110 million bpd.
Such an imbalance would allow countries to begin rebuilding depleted inventories and reassessing strategic petroleum reserves after months of supply shocks and market volatility.
Meanwhile, OPEC+ production remained constrained in May, with total output falling to 30.3 million bpd.
Saudi Arabia produced 6.59 million bpd during the month, while Russia pumped 8.74 million bpd. Iran’s output stood at 2.3 million bpd and Iraq produced 1.48 million bpd.
The IEA noted that production losses in the Gulf are increasingly being offset by rising output from non-OPEC+ producers, particularly in the Americas. Releases from the United States Strategic Petroleum Reserve have also helped sustain crude exports to markets east of the Suez Canal.
At the same time, Asia’s two largest oil consumers have significantly reduced purchases. China and Japan together cut crude imports by nearly 6 million bpd, representing about 40 percent of the global decline in imports as slowing refinery activity dampened demand.
The latest outlook suggests that while geopolitical tensions may be easing, the global oil market remains fragile, with demand, supply and inventory levels still heavily influenced by the aftershocks of one of the most disruptive periods in recent energy market history.
